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As an advisor of M&A deals in real estate, what makes a deal successful in your view?
There are a lot of stars that need to align to ensure a successful M&A deal. Based on my experience, there are a number of key components to success, specifically timing, transparency and technical/transactional proficiency.
Firstly, related to timing, I like to rely on the old adage that ‘time kills deals.’ When approaching a transaction, it is important that both parties are prepared to move forward and have sufficient resources to move forward promptly and professionally. I have witnessed many deals fall apart as one or both sides were not properly organised to move the transaction forward on a timely basis. This relates to financial, physical, and legal due diligence periods, as well as the arrangement of financing and basic decision-making processes.
Before you go out into the market to pursue M&A opportunities, it is recommended that investors assemble a competent and experienced deal team in advance, have due diligence questionnaires prepared, understand your designed structure and ensure that your financing is available and there is a clear framework for decision making. The same can be said on the sell-side. Second, I believe transparency is critical, it is important that both sides manage expectations and ensure they are not committing to things that cannot be delivered. This leads to a breakdown in trust which is often an early symptom of a dying deal.
Lastly, M&A is complex and requires experienced professionals to carry out and coordinate the process. When two experienced deal teams work together, the chance of timely success is much greater. If you do not have an experienced in-house team, you should consider bringing on an advisor for support.
Given our past involvement in deals that were worth hundreds of millions of dollars, we have strong expertise in M&A transactions rooted in our experience and success, whether it is for ourselves or our clients. Our job here at Indochina Strategic is to provide our clients ample support and advice through our market experience and guide them through this complicated process.
What strengths can you offer to your clients when it comes to advising M&A deals?
We see two types of service providers in the M&A space in Vietnam. There are agents and brokers who simply connect buyers and sellers and facilitate an introduction without actual experience and knowledge of deal execution procedures. And then there are advisors who actually have the experience and capabilities to drive a transaction through the finish line. This includes the due diligence process, negotiating commercial terms, obtaining the required licences, and the financial arrangements leading up to the closing of the deal. We take the latter approach, where we bring in practical experience to support our clients through each step of a transaction from introducing an investor or seller all the way through to closing and handover.
As I said before, given our experience from past M&A deals, Indochina Capital stand out from other consultants with our ability to advise clients on a number of issues, such as the feasibility of a site given the client’s ambitions, determining a suitable price point that is fair to both parties, structuring the deal to achieve the optimal legal and financial outcome, and most importantly, collaborating with legal authorities and financing institutions to work towards a successful deal execution.
As we have played both roles, we understand the perspectives of the buyer and the seller. This is a big advantage for us, and it has helped us find effective solutions to resolve differences between the parties to finalise a transaction.
Local sellers of real estate projects are said to be in an inferior position, should they desire to go through an acquisition with a foreign buyer. Why is this the case and could you please give a case study where you have fruitfully advised on one such deals?
In order to understand these types of deals, you need to understand their context.
First, foreign buyers are subject to far more legal restrictions. For example, they cannot acquire a real estate asset directly like a local entity, but have to purchase the shares of the holding company of the asset. This requires the local seller to set up a Special Purpose Vehicle (SPV), an entity set up to hold the transaction’s asset, which is often not done until being requested and by that point it may be too late or too expensive.
Second, foreign buyers have more requirements pertaining to the due diligence process of the transaction, particularly when it comes to understanding the legal status. They want the property to be completely “clean” in terms of licensing and approvals, which is unfortunately not often the case, as there are many situations in Vietnam where developers violate their construction permits (for instance the building is higher than permitted or it has larger floor plates, and so on). We have seen many deals fail because of this.
Third, Vietnamese real estate assets are plagued by poor record keeping and financial reporting, especially at private and family-owned businesses. Key documents are very often missing, reducing trust between the two parties. The foreign buyer would be unable to substantiate their financial projections and returns, which will drive down the property’s valuation. Due to all of these reasons, local sellers have to work harder in order to successfully close a deal with a foreign buyer.
As such, I would disagree and say that foreign investors are in an inferior position when dealing with local sellers.
Recently at Indochina Strategic, we successfully brokered a deal between a local seller and a foreign buyer. The Sales and Purchase Agreement (SPA), which mandates the buyer and seller to carry out the transaction, has been executed, and the deal is now in the final stage of fulfilling its conditions precedent to completing the transaction. During this assignment, we assisted the foreign buyer on asset valuation and deal structuring, and have played a major role in resolving the problems that arose during the due diligence process for the foreign buyer in order to facilitate the deal. Again, in this particular case, our client, the foreign buyer, was often put on the back foot as the seller did not honour their commitments under the agreement on multiple occasions.
Do you think Vietnam has a strong legal framework to back up M&A activities? What more should be done to fuel M&A deals between local sellers and foreign buyers?
The short answer is no, by simply looking at the total number of reported successful M&A transactions. We see significant supply and demand with many opportunities in the market, however, the deal volume is not as high as it should be, and legal issues are one of the main reasons behind this.
To facilitate M&A transactions, there are two areas where the legal framework can be improved: the licensing and obtaining of approvals for project development and for M&A transactions themselves. Regarding the first point, real estate development requires many licences and approvals, many of which are not clear-cut and straightforward. The monitoring of compliance with the approved project parameters is also a weak point for the Vietnamese government, which further compounds the issue. There are many developments that move forward without proper licensing or that proceed in conflict with what has been approved. This will make the asset difficult to sell.
On the second point, it is easier to obtain the correct licences and approvals for an M&A transaction than for the development of a project, but this process could also be streamlined to increase the volume of successful deals in Vietnam.
In our opinion, a special task force should be established to review the current procedures and zero in on areas that can be improved. This task force should also be in charge of monitoring compliance with the issued licences and approvals. The government should learn from the procedures that are adopted in developed countries, as they will be able to find many solutions to our problems by studying these effective legal structures.
What do you think about the value of M&A transactions reported in the real estate market so far? Are they relatively small in scale compared to deals seen in other nations? What should be done to improve both the quantity and quality of M&A deals in the country?
Generally, the value of M&A transactions in Vietnam is below $100 million, with the great majority in the vicinity of the $50 million threshold or below. Compared to other countries, these transactions are indeed smaller in scale. The reasons for this are twofold.
First, many real estate transactions in Vietnam involve greenfield land instead of developed properties. By itself, the value of the land is quite small. In this market, assets with an existing structure or development will significantly increase the value of the deal, and we will only start to see larger amounts of money being exchanged once this becomes the norm.
Second, due to the fact that the Vietnamese real estate market is still relatively young and small, there is a lack of sizeable operating properties in Vietnam that will draw the interest of large international investors. As the market develops, the presence of mega developments will grow and innovative real estate properties will arrive to the market, creating a more diverse portfolio of assets for investors. In such conditions, we would observe a bigger quantity of large M&A transactions, such as the Kumho Asiana transaction by Mapletree that spurred the market in 2016.
In reality, there is not one specific thing that the Vietnamese authorities can do to improve the investment landscape. The small deal size is a result of market forces, and we need more time for the market to evolve and improve itself. Nonetheless, a more transparent and equitable land allocation would help to ensure that good land plots fall into the hands of reputable developers and maximise the potential of the asset. It is a real shame when we see low quality developments in prime locations, which severely deteriorates the value of the property.
Do you have any particular advice to your clients, given the current political and economic developments around the world and Vietnam?
Timing is everything in real estate and political and economic issues have an enormous impact on the global and domestic real estate market. I would encourage investors to really understand and continuously monitor the economic and political environment. Changes in these factors can stimulate significant changes in property values and market demand.
This is particularly important as it relates to timing and the investment horizon for a particular deal. I often see investors waiting for news or a noteworthy event which triggers a significant market change before they take action. As an astute investor, it is wise to monitor these factors on an on-going basis and look for signs (changes in political leadership, stock-market performance, interest rates, inflation, and currency fluctuations)-by watching these factors closely, with proper analysis, we can make educated forecasts and projections about where we are in the market cycle and adapt our strategies on a timely basis.
Stay informed and stay current, feel the pulse of the market, and trust your instincts.